More Signs Of A Bottoming Out

Robert S. Reichard, Economics Editor

N ew industry numbers continue to suggest the hemorrhaging of the past year is finally
beginning to stop. Mill shipments, for example, have bottomed out. Equally significantly,
inventories, which have dropped sharply from year-ago levels, are now a lot more manageable.

Stock/shipment ratios are pretty much down to normal levels. Production, too, is beginning to
look a little better, with mill output at last report (March) rising 7 percent above the low point
hit this past November. And further small gains are expected for early spring.

Even prices have shown some slight firming — with latest levels for both greige goods and
finished fabrics rising close to 1 percent above their month-earlier levels.

Finally, there are even some reports of improving profits. Cone Mills showed a first-quarter
$1.4 million earnings figure (2 cents/share) — a welcome change over the year-earlier loss of $2.9
million (15 cents/share). WestPoint Stevens also managed to eke out a small profit.

Near-Term Projections Better

Also encouraging are the findings of a new survey by the Institute of Supply Management (ISM).
The firm’s forecasts for textiles and other industries are usually pretty accurate because they
represent expected trends at the grassroots manufacturing level.

In any event, the group is predicting 2002 mill gains in both industry output and profit
margins. Another ISM finding confirming industry confidence over the longer pull: mills plan to
increase production capacity this year by about 3 percent. About the only negative finding: some
further increase in import volume.

On another rosy note — the latest projections by the big DRI-WEFA econometric consulting firm
also suggests the first signs of a textile turnaround. New third- and fourth-quarter mill revenues
are projected to increase at 0.8 percent and 1.7 percent annual rates, respectively. Zero in on
carpets, and the gains are a lot more impressive — 2.8 percent and 5.5 percent, respectively.

Productivity Progress

Mill efficiency has been faring quite well, too. New U.S. figures covering the last decade show
some impressive annual average gains: 3 to 4 percent in the case of broadwoven fabrics; 2 percent
for narrow fabrics; and nearly 4 percent for knitting mills.

These gains, coupled with very modest pay increases, have helped keep unit labor costs
relatively unchanged. Moreover, there are indications that this trend is continuing. Thus,
employment over the past year dropped 11 percent.

That’s far more than the 4-percent-or-so decline in mill output over the same period — and it
implies another solid productivity advance. Couple this with a jump in overtime — and this all
suggests that mills are using their new efficiencies to maintain production while continuing to
keep a tight rein on payrolls.

Fiber Costs Turn Mixed

Meantime, there’s good and bad news on the fiber cost front — with weak cotton being offset by
firming polyester. Looking at cotton first: new farm legislation should help keep downward pressure
on the natural fiber by encouraging more plantings.

That would be on top of this year’s most recent estimate (taken before passage of the new
farm bill), which points to the planting of more than 248 million acres — relatively unchanged from
last year’s level. Not surprisingly, cotton quotas in recent weeks have, on occasion, dropped below
30 cents per pound — with little indication of any meaningful rally.

Confirming the outlook for continuing downward pressure, the International Cotton Advisory
Council puts this year’s gap between output and mill use at nearly 6 billion tons — the highest
reading in more than 15 years. A top industry analyst seconds this excess-supply appraisal —
suggesting that the new farm program should guarantee surplus production for another six years.

Polyester Heads Up

On a more sobering note for mills, this persistent cotton weakness is being offset by higher
postings on polyester staple and filament. Blame it on a combination of higher petrochemical costs
and improving demand.

On the latter score, year-to-date shipments are running well above 2001 levels. In any event,
producers are trying to push through big 7- to 10-percent increases, which would bring staple and
filament tags up above 50 cents per pound and 70 cents per pound, respectively.

Whether all of this holds up, however, remains to be seen — in part because the
above-mentioned easiness in cotton could well siphon off demand from these man-made
alternatives.